Why Vedanta, NALCO, and Hindalco Could See a 40% Crash

Investors in the Indian metals sector are facing a stern warning as InCred Equities turns bearish on aluminium stocks. The brokerage has issued a sell advisory, predicting a potential 30–40% downside for major players like Vedanta Aluminium, NALCO, and Hindalco Industries.

The Myth of Primary Metal Scarcity

The core of InCred Equities' bearish stance lies in a fundamental misinterpretation of aluminium's market dynamics. While many investors view aluminium through the lens of a primary metal—similar to crude oil or coal where supply constraints drive prices—InCred argues that aluminium is actually an "above-ground circular metal."

Unlike commodities that are consumed and lost, approximately 80% of all aluminium ever produced remains part of the usable metal pool. With nearly 1.5 billion tonnes of aluminium available above ground, the true supply metric is not just primary smelting capacity, but the efficiency of the recycling ecosystem. The brokerage suggests that the market is overlooking how quickly scrap can be collected, sorted, and reintroduced into the supply chain, which acts as a massive buffer against perceived shortages.

Lessons from China's Secondary Market

China provides a critical case study for this "circular" reality. While China's primary aluminium output has risen from 41.6 mt in 2023 to 44.0 mt in 2024—nearing its 45 mtpa policy cap—this structural tightness is an illusion when secondary sources are considered.

InCred highlighted that China’s secondary aluminium consumption is projected to rise from 12.7 mt in 2024 to 13.35 mt in 2025. Furthermore, scrap imports are expected to increase from 1.7 mt in 2023 to 2.02 mt in 2025. Because roughly 80% of China's scrap supply is domestic, the visible deficit in primary production is being seamlessly replenished by rising recycling capacities and scrap availability.

Geopolitical Shocks and Stretched Valuations

Recent Middle East disruptions, which impacted approximately 2.2 mtpa of primary capacity, are viewed by InCred as temporary rather than structural. While regional risks exist, supply from major players like Qatar Aluminium and Alba is expected to normalise quickly. As the "war-risk premium" unwinds, London Metal Exchange (LME) aluminium prices are expected to correct, even if inventories remain low.

With aluminium prices vulnerable to a drop toward the $800/ton mark, current valuations for Indian metal giants appear unsustainable. Recent market data reflects this growing anxiety:

  • Vedanta Aluminium Metal: Down over 10% since its market listing last week following its mega demerger.
  • NALCO & Hindalco: Both have seen significant declines, with major aluminium stocks falling up to 16% over the past month.

Given these headwinds, InCred has issued a ‘Reduce’ call on both NALCO and Hindalco Industries, warning that the downside risk remains substantial.

Key Takeaways

  • Circular Economy Impact: Aluminium is a highly recyclable resource, meaning "above-ground" scrap supply can offset primary production deficits.
  • Correction Imminent: As geopolitical risk premiums in the Middle East fade, LME aluminium prices are expected to face downward pressure.
  • Valuation Warning: Major stocks like NALCO, Hindalco, and Vedanta Aluminium are considered overvalued, with a projected downside of 30–40%.